Tuesday, June 21, 2011

What really happened in the 1980s and where are we now?

From a personal perspective, the 1980s was an alarming decade. It was that time when our family sought to buy a small rural block of land in the North West of Tasmania, Australia. It was our first major purchase. Within the space of two years however we felt the awful financial consequences of the doubling of land prices combined with extraordinarily high real interest rates on our mortgage. There were few jobs at the time - and low-paid at that - to cushion this dramatic decline in our standard of living and the debt burden that went with it. [1]

So what happened? Why have we gradually moved into a world where it's taken for granted that both parents go out to work, that a normal household lives under the burden of (often) unprecedented levels of debt and where Fukushima logic in the industrial sphere has left many people with a dreaded fear of humanity's extinction event in the short run? The following economic and social narrative may partly explain what I see as our frightening historical evolution into multiple and ubiquitous tipping points.

World oil production per capita peaked in 1979 [2]. It could be argued that this change occurred - not necessarily as a function of resource depletion - but in direct relation to structural shifts in the national and the global economy that evolved in the previous decades. Consumerism, for instance, "proliferated in the US in the 1920s and 1930s, spread to other industrialised nations after the Second World War, particularly in the 1950s." [3] In addition, the US dollar, as the global reserve currency, became unhinged from gold as the Bretton Woods international trading system gradually collapsed. This currency then morphed into a 'petro-dollar' that sustained US global economic hegemony. Nations that purchased oil were forced to find a way to purchase US dollars.

The nine-fold increase in global oil prices in the 1970s heralded new economic norms around the world. For example, the same material quantity in transactions simply involved greater cash flow. GDP rose whilst economies stagnated. No interest rate policy - including the abandonment of usury limits on interest rates by President Carter - was found to contain inflation from the higher energy prices [4]. Economic bubbles formed.[5]

Profit was shifted to different sectors of the national and global economies. Finance became a big 'winner' as family farms declined dramatically [6].

High energy prices, in turn, translated into reduced consumption. In the corporate sector increased productivity derived from the steady abandonment of environmental controls (including the almost totally unsupervised employment of nuclear energy). Global labour and interest-rate arbitrage by multinationals also produced more profit per unit of labour (productivity again). Workers around the world often simply worked longer hours, if they could find jobs at all. A world 'jobs crisis' steadily gained momentum from the 1970s onwards to present day. [7]

Income inequality began to explode under Reagan and by the end of the 1980s the lax environmental regulation began to translate into poorer health outcomes for citizens [8]. So did the steady global depletion of water and cropland.[9] Ronald Reagan gutted the federal anti-trust authorities in America. "Mergers in finance, communications, entertainment, oil, retailing, and on led to the consolidation of economic power in America." [10] The continuing cultural notion that consumption was an indicator of social achievement also participated concentrating economic and political might into fewer hands.

US Government and its leading allies engaged in rigging the value of major global currencies in an unpredictable fashion in order to counter one financial or corporate profit crisis after another [11] Businesses responded by trying to hedge their bets in this uncertain international trading environment. Asset-backed securities (ABS) became popular in the world of structured finance (derivatives).

In the US major cities and public corporations were being kept from bankruptcy by the tax dollars of ordinary citizens. Meanwhilst most leading international banks were insolvent by every standard except by nomenclature [12]. This was largely due to their improvident long-term loans to Third World countries. These loans were often forced on many US banks by the pressure from government to solve the oil-price-currency overhang in the first instance [13]. "Petro-dollar recycling programs allowed lesser developed nations to purchase oil even as its price skyrocketed, and was actively promoted by the United States." [14] Unsustainable third world debt led to US banks lending further funds to these troubled nations to avoid catastrophic debt default.

By the 1990s the primary contradictions of the global economy were evident: " (i) a contradiction between economic mode of organization and national states, (ii) progressive expansion of fictitious capital, (iii) greater class, ethnic, international and subnational tensions were generated. [15] Neoliberalism had failed to deliver the goods. It was clear that the US, as the world leader in economic growth was doing so by reducing everyone else's.

Capitalism is now in crisis. It's no surprise, after all. Vulnerable nations around the world have been prompted to build up their reserves. Massive trade imbalances ensued as a result. This excessive liquidity from 'emerging' nations and debt-dependent consumption in industrial countries (lower wages/workers using rising asset values on their homes as income) has come to the inevitable bust.

Despite all the rhetoric of 'free markets' that sustained the global neoliberalst agenda, the big corporations of the world's 'military-industrial complex' were bailed out (yet again) by taxpayers. Alarmingly, however, the accumulated debts gathered in the previous 45 years of ponzi capitalism have proved to be beyond the ability of sovereign states to sustain. (But at last, it is no longer possible for the mainstream media to continue to compute the virtues of purely competitive markets to monopoly and oligopoly!)

This month the world's biggest central bank, the US Federal Reserve, is levered 50 to 1. Another bout of quantitative easing seems inevitable as the era of unprecedented monetary expansion goes on and on. The traditional assumption to date has been that "economic growth will return and facilitate the repayment of sovereign loans and mop up the excessive liquidity." [16] This time, however, the reduced energy flows around the world are real! We are in an oil plateau that began in 2004 [17]. In the latter half of this year world oil production has been predicted to go into decline.[18] We have not been blessed with a form of governance that would prepare the world for such a crisis. But that's not the only one.

"Now we have entered an age of growing crisis, of shock piled upon shock: vertiginous food price spikes and oil price hikes, devastating weather events, financial meltdowns and global contagion." Says an Oxfam report published this year [19]. A similar sentiment is repeated in many thousands of forums across the internet.

“The system has reached the stage that a bankrupt sovereign state is issuing debt to buy bonds in a vehicle that is tasked with buying debt from a bankrupt Sovereign state that is no longer able to go to market. Folks this is reaching the level of a Monty Python skit.” [20]

“Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”[21]

The situation is evolving very fast. As 30% of people in the US rely on loans taken out against their retirment pensions [22] a list of US President Obama's leading economists are stepping down. [23] As the global food system fails [24] it appears that the student loan crisis could be a bigger financial failure than the housing crisis [25].

Here in Australia the economy is reported to have suffered its worst fall since 1991 as record floods, other natural catastrophe's and obvious government mismanagement of finances and resources devastate the economic base of the nation. [26]

Whilst crowds of people riot in the streets of Greece and many other nations the home in the valley gives me a degree of refuge from the hidden fist of the market.... for the time being. There is also some kind of personal reassurance in having found a rough narrative to help me clarify some of the reasons as to how we may have got to this 'place' we're in now, together. But I don't have the answers. Today's predicament poses demands for great and immediate change. Most immediately I see the demand for a quick evolution of a sustainable indigenous economy.

But what we do on our own probably won't get us very far.

Through others, we become ourselves.[27]

REFERENCES:[1] In the late 1970s and the early 1980s US households experienced a major debt peak relative to personal income and this phenomenon repeated in other nations. http://www.doctorhousingbubble.com/wp-content/uploads/2009/06/debt-and-income.pngThe rise in debt in the US corresponded with the rise in the price of oil and money.See: http://1.bp.blogspot.com/-yzbG3IFxxlE/TVaIG8lo2_I/AAAAAAAABDE/z5smLB5GtdA/s1600/FRED-FEDFUNDS.pngandWhy Growth is DeadThursday, May 12, 2011, 1:47 pm, by cmartensonhttp://www.chrismartenson.com/blog/why-growth-dead/57764?

[2] The Peak of World Oil Production and the Road to the Olduvai GorgeRichard C. Duncan, Ph.D.Pardee Keynote Symposia, Geological Society of America. Summit 2000.Reno, NevadaNovember 13, 2000. …World Energy Production per Capita: 1920-1999http://www.hubbertpeak.com/duncan/olduvai2000.htm

[3] Stewart Lansley, After the Gold Rush: The Trouble with Affluence: 'Consumer Capitalism' and the Way Forward (London: Century Business Books, 1994), p. 85.

[4] Inflation in the US (according to CPI measures) declined between 1981 and 1983 then began a long-term rise. The True Meaning Of InflationJohn Tamny, 01.25.10. Forbes magazine.http://www.forbes.com/2010/01/24/inflation-prices-gold-standard-opinions-columnists-john-tamny.html

[6] The Economy in the 1980shttp://countrystudies.us/united-states/history-137.htmSource: US Department of STate

[7] Duration of unemployment in the US, Bureau of Labor Statistics as found at:IMF fears 'social explosion' from world jobs crisisBy Ambrose Evans-PritchardPublished: 11:00PM BST 13 Sep 2010http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8000561/IMF-fears-social-explosion-from-world-jobs-crisis.html"America and Europe face the worst jobs crisis since the 1930s and risk "an explosion of social unrest" unless they tread carefully, the International Monetary Fund has warned."

[9] In 1999 it was reported that "For the first time since China's great famine claimed 30 million lives in 1959-61, rising death rates are slowing world population growth." The World Watch Institute wrote that the AIDS epidemic and water and cropland shortages problems largely ignored by the international community for years are the major cause. See:Lester R. Brown, coauthor with Gary Gardner and Brian Halweil of Beyond Malthus: Nineteen Dimensions of the Population Challenge. [1999]via the World Watch InstituteCan be downloaded at: http://www.worldwatch.org/system/files/EWB110_0.pdf

[13] See William Greider's 'Secrets of the Temple - How the Federal Reserve Runs the Country'

[14] Cardoso, Eliana and Helwege, Ann. Latin America’s Economy. p.116 and Pastor, Robert A. ed. Latin American DebtCrisis: Adjusting to the Past or Planning for the Future. p.54 and U.S. Senate Joint Economic Committee Website. As quoted in:The Latin American Debt Crisis of the 1980s and its Historical PrecursorsAlexander Theberge. April 8, 1999

[22] 30% Of People With A 401(k) Have Taken Out A Loan Against It: New All Time RecordTyler Durden's pictureSubmitted by Tyler Durden on 06/09/2011 18:47 –0400http://www.zerohedge.com/article/record-number-people-have-taken-out-loan-out-against-their-401k

[23] Top White House economist Goolsbee steps down6th June 2011http://www.reuters.com/article/2011/06/07/us-usa-obama-goolsbee-idUSTRE75603120110607

[24] How The Global Food System Is FailingFree Internet Press.IntellpukeWednesday, June 1, 2011http://weeklyintercept.blogspot.com/2011/06/free-internet-press-intellpuke-domingo.html

[25] The Next Bubble Is About to Burst: College Grads Face Dwindling Jobs and Mounting LoansBy: ActivistPosthttp://www.activistpost.com/2011/06/next-bubble-is-about-to-burst-college.html

4 comments:

The left is the last place I'd expect a discussion of the Great Inflation to come from.

The left sought the breakup of the Bretton Woods system because it was inhibiting massive pumping of aggregate demand, inhibiting massive spending on social services and so on etc. International gold flows out of your country were a way for the world to assess whether your investments in medical care, poverty spending etc were actually going to pay off as claimed. Lefties didn't like the assessments, loss of gold was embarrassing, and so they were happy to get rid of the messenger.

If you want to bring it up then fine, but there is much more ammunition on the righty side of the argument, and there are plenty of guys here who are devoted to the floating dollar and the diminishing effect it had on physical trade as opposed to financial. That part I agree with. But that is just an effect of massive inflation and the disjointed way prices adjust to the new value of the dollar.

"The 'Right', among other things, means - what you are doing, celebrating society as it is, a going concern. Left, means, or ought to mean, just the opposite. It means structural criticism and reportage and theories of society, which at some point or another are focussed politically as demands and programs...guided morally by the humanist and secular ideals of Western civilisation..."C Wright Mills 'Power Politics and People' page 253.

I'm not sure why the 'Left' would seek to break up Bretton Woods when it was doing that all by itself in the first instance.

The words 'aggregate demand', 'social services', 'medical care' and 'poverty spending' don't tell us much about what is actually happening on the ground. The terms reek of bureaucracy.

My bias is toward small government, small technologies, small businesses. For humanist reasons. Global nuclear disasters can't be responded to with local and small teams, however.

World energy production also peaked in 1979, according to the following references:

THE PEAK OF WORLD OIL PRODUCTION AND THE ROAD TO THE OLDUVAI GORGERichard C. Duncan, Ph.D.1Pardee Keynote SymposiaGeological Society of AmericaSummit 2000Reno, NevadaNovember 13, 2000http://dieoff.org/page224.htm"Notes: (1) World average energy production per capita (ê) grew significantly from 1920 to its all-time peak in 1979. (2) Then from its peak in 1979 to 1999, ê declined at an average rate of 0.33 %/year. This downward trend is the "Olduvai slope", discussed later. (3) The tiny cartoons emphasize that the delivery of electricity to end-users is the sin quo non of the 'modern way of life'. Not hydrocarbons.

Observe the variability of ê in Figure 3. In detail: From 1920 to 1945 ê grew moderately at an average of 0.69 %/year. Then from 1945 to 1973 it grew at the torrid pace of 3.45 %/year. Next, from 1973 to the all-time peak in 1979, growth slowed to 0.64 %/year. But then suddenly — and for the first time in history — ê began a long-term decline extending from 1979 to 1999. This 20-year period is named the "Olduvai slope," the first of the three downside intervals in the "Olduvai schema."

Bottom Line: Although world energy production (E) from 1979 to 1999 increased at an average rate of 1.34 %/year, world population (Pop) grew even faster. Thus world energy production per capita (ê) declined at an average rate of 0.33 %/year during these same 20 years (Figure 3). See White's Law, top of this section.

Acknowledgments: As far as I know, credit goes to Robert Romer (1985) for being first to publish the peak-period data for world energy production per capita (ê) from 1900 to 1983. He put the peak (correctly!) in 1979, followed by a sharp decline through 1983, the last year of his data. Credit is also due to John Gibbons, et al. (1989) for publishing a graph of ê from 1950 to 1985. Gibbons, et al. put the peak in 1973. But curiously, neither of the above studies made any mention whatever about the importance of the peak and decline of world energy production per capita.

The 1979 peak and decline of world energy production per capita (ê) is shown at http://www.bp.com/centres/energy/ . Have a look."

I'm not at all sure exactly how accurately one can measure the availability and production of energy in the economy, however.

Having re-read this article I now regret my omission of any reference to the work of folks like Jay Forrester and company for their publication of 'Limits to Growth' in 1972 (the year before world oil per capita ceased to increase.)

The consumers around the world should have also born a bit more blame for our current predicament.

"In 1972, the Club of Rome (COR) shocked the world with a study titled The Limits To Growth. Two main conclusions were reached by this study. The first suggests that if economic-development-as-we-know-it continues, society will run out of nonrenewable resources before the year 2072 with the most probable result being “a rather sudden and uncontrollable decline in both population and industrial capacity.” [1] The second conclusion of the study is that piecemeal approaches to solving individual problems will not be successful. For example, the COR authors arbitrarily double their estimates of the resource base and allow their model to project a new scenario based on this new higher level of resources. Collapse occurs in the new scenario because of pollution instead of resource depletion. The bottom line is traditional forms of economic development will end in less than 100 years – one way or another. The COR study has been much belittled but proof of the COR's thesis can readily be found in the real-world concept of “net energy”..."http://jayhanson.us/netEnergy.pdf